The Impact of NAFTA on U.S. Local Labor Market Employment

Abstract

This paper studies the impact of the North American Free Trade Agreement on U.S. local labor markets, based on cross-regional variation in exposure to the U.S. and Mexico's tariff liberalization. Lower U.S. tariffs led to a relative decline in the share of the working-age population employed in manufacturing (especially among low-skilled workers) in more exposed regions, and increases in unemployment and in the share of the population employed in certain low-pay non-manufacturing industries. Employment losses due to U.S. tariff liberalization were much larger among female and nonwhite workers. U.S. tariff cuts also induced changes in the task composition of employment, leading to a decline in employment in production-related routine occupations and an increase in abstract occupations. The contraction in manufacturing employment and in production-related routine employment and the rise in unemployment as a result of U.S. tariff liberalization were concentrated in parts of the South and Midwest with relatively lower human capital. Mexico's tariff cuts, in contrast, did not have a discernible impact on most U.S. local labor market employment outcomes.

Keywords: NAFTA, Trade policy, Tariffs, Employment, Unemployment, Local Labor Markets

JEL Classification: F1, J2